Zacks_Analysts' Blog : Ruby Tuesday Reports In Line - Analyst Blog

Ruby Tuesday Inc. (RT), a casual dining restaurant operator, recently reported its first quarter 2012 earnings of 5 cents per share, in line with the Zacks Consensus Estimate, but below the year-ago quarter earnings of 19 cents.

Total revenue in the quarter jumped 9.1% year over year to $330.3 million and was in line with the Zacks Consensus Estimate. The year-over-year upside in revenue was attributable to franchise partnership business acquisitions in 2011.

Inside the Headline Numbers

Restaurant sales were up 9.4% to $328.9 million, while franchise revenues plunged 27.4% to $1.5 million due to franchise partnership acquisition.  

During the first quarter of 2012, comparable store sales declined 4.1% due to the adverse impact of Hurricane Irene. Comparable store sales at domestic franchised restaurants dropped 3.7%.

The restaurant level operating margin contracted 290 basis points (bps) year over year to 15.1% (as a percentage of company-operated restaurant sales) due to a 110-bp upside in payroll and related costs to 34.4%, a 110 bp jump in other restaurant operating costs to 20.9% and a 140 bp rise in cost of merchandise to 29.7%.

Stores Update

During the quarter, the company did not open any new company-owned restaurant, but closed down two. The company opened two domestic and international franchised restaurants in the quarter, but closed down three.

For 2012, the company plans to close three to five company-owned restaurants, convert six to eight company-operated restaurants into other high-quality dining concepts and open one new restaurant. Ruby Tuesday is also planning to open six to eight Lime Fresh Mexican restaurants.

The company plans to open seven to nine franchised restaurants in 2012, out of which six will be international. Ruby Tuesday also expects to close 14 to 16 restaurants, out of which 14 will be in the international market.

Financial Position

Ruby Tuesday ended the quarter with cash and short-term investments of $8.3 million, long-term debt of $330.2 million and shareholders’ equity of $579.6 million. Capital expenditures at the end of the quarter were $8.4 million.

During the reported quarter, the company also repurchased 2 million shares at an average price of $9.22.

Outlook

For fiscal 2012, management expects earnings in the range of 60 cents to 75 cents per share, comparable-store sales for company-owned restaurants to be flat to down 2% and restaurant operating margins to contract slightly. For 2012, capital expenditures are estimated between $33 million and $37 million and free cash flow in the range of $90 to $100 million.

For the second quarter of 2012, the company estimates a loss of 4 cents to 8 cents per share due to a 2–3% dip in same-store sales and higher advertising and interest expense.

Our Take

We remain enthusiastic about the company’s future strategies including improving margins by lowering costs, driving same-restaurant sales through several value offerings, focusing on low capital growth opportunities and returning excess cash to shareholders.

However, uncertainty in the economy, stiff competition from peers and continued investment in product offerings as well as other initiatives may strain its margin and cash flow generation.

The company expects results in the upcoming quarter to be disappointing and thus we expect estimates to plunge going forward.

Ruby Tuesday currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.

One of Ruby Tuesday’s primary competitors, Morton’s Restaurant Group, Inc. (MRT) posted second quarter 2011 adjusted earnings of 5 cents, beating the Zacks Consensus Estimate by a penny. The earnings were driven by improvement in business travel resulting in positive comps for the sixth consecutive quarter and margin expansion.